U.S. Dollar At A 20-Year Highs Is Bad News For Bitcoin
Crypto Briefing | Sep 25, 2022 04:04AM ET
The dollar index is at its highest level in more than 20 years—and risk assets like cryptocurrencies are feeling the pain. Bitcoin and the broader crypto market are struggling to stay above their June lows due to renewed strength from the dollar. Bitcoin is battling against the dollar—and it’s losing.
The dollar index (DXY), a financial instrument that measures the price of the U.S. dollar against a basket of other currencies, hit a fresh 20-year high Friday, sending other world currencies and risk assets lower. DXY, which measures the dollar's value against a basket of other currencies, topped 112 earlier this morning. It’s trading at around 112.8 at press time, per TradingView data .
The crypto market has been hit particularly hard in recent weeks due to renewed strength of the greenback. In August, Bitcoin enjoyed a brief rally to $25,200 as the dollar retraced from its July highs. However, since then, crypto assets have been crushed under the weight of the rising dollar. Bitcoin now appears pinned under $20,000 while the dollar continues to climb, trading at around $18,810, per CoinGecko data .
Much of the dollar’s positive price action can be traced back to rising interest rates from the Federal Reserve. As the Fed raises rates to fight inflation, it tightens U.S. dollar liquidity. This should help bring inflation back down by making it more expensive to borrow money, thereby reducing demand. However, one side effect of such a regime is that it makes the dollar a much more attractive investment.
Get The News You Want
The tightening of dollar liquidity means market participants have less cash to invest in riskier assets like cryptocurrencies and stocks. In turn, this reduces demand, causing asset prices to fall. The Federal Reserve has also stopped buying U.S. Treasury bonds as a tightening policy. This has caused yields on U.S. bonds to rise, which helps the dollar’s value increase as more investors buy these bonds.
h2 The Dollar Milkshake Theory/h2It’s not just crypto and stocks suffering from a soaring U.S. dollar. As the Fed started raising rates to combat inflation before other nations and has been increasingly aggressive in the size of its hikes, liquidity from the global economy is flowing into U.S. dollars at a record pace.
This effect was coined the “Dollar Milkshake Theory” by Santiago Capital CEO Brent Johnson. It posits that the dollar will suck up liquidity from other currencies and countries worldwide whenever the Fed stops printing due to its place as the world’s reserve currency.
Since the U.S. reserve bank turned off its money printer and started tightening liquidity in March, the Dollar Milkshake Theory appears to be playing out. The euro, the currency that receives the biggest weighting against the dollar in the DXY, has plummeted throughout 2022, recently hitting a new 20-year low of 0.9780 against the dollar.
Other world currencies aren’t faring much better. The Japanese yen tumbled to a 24-year low Thursday, prompting government intervention to help shore up the currency. While the European Central Bank has responded to the weakening euro by raising interest rates, the Bank of Japan has so far refused to do so. This is because it is actively engaged in Yield Curve Control, keeping interest rates at -0.1% while buying an unlimited amount of 10-year government bonds to keep the yield at a target of 0.25%.
As things stand, it’s looking increasingly difficult for assets such as cryptocurrencies to find strength amid a deteriorating global economy. However, there are several signs investors can look out for that could indicate an end to the dollar’s dominance and its knock-on effects.
If next month’s Consumer Price Index data registers a notable drop, investors could turn to riskier assets in the hope that the Fed will temper its interest rate hikes. Elsewhere, a resolution to the current Russo-Ukrainian War could help alleviate the global energy crisis by reducing the cost of oil and gas. Still, for the time being, the dollar’s rise isn’t showing any signs of slowing—and that could keep crypto trapped near its yearly lows.
Original Post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.